Real Estate

Hungarian Land Remains in Hungarian Hands: Acquisition Privilege for Local Farmers

Foreign investors may stop viewing Hungarian farmland as a preferred investment target on a longer term, as the government plans to pursue extensive intervention in land sales. The bill of the New Land Act has been submitted to the Hungarian Parliament for approval. It introduces strict restrictions on leasehold and ownership title transfer of agricultural land and forestry after the transitional sale moratorium, expiring on 30 April 2014. Non-discrimination and EU compliance is stated, but will be tested.

Purchase moratorium to end soon

Back in 2004, the country’s EU accession treaty introduced transitional measures to exempt the national market from the fundament of free movement of capital and to prohibit land purchases by foreigners until 2011. The measures were put in place in an effort to prevent wealthy European investors from a massive takeover of cheap arable lands in Hungary, a less developed new member state. Based on governmental initiative, the transitional period was extended to 30 April 2014.

The current regime generally prohibits land ownership by both domestic and foreign legal entities and by foreign private individuals. In addition, there is an upper limit of 300 hectares of maximum ownership by a domestic natural person. As one of the rare exceptions applicable to acquisition by foreigners, EU nationals willing to act as self-employed farmers may be subject to the same rules that apply to Hungarian nationals, if they have been legally staying and farming in Hungary for at least three years.

As no further extensions are possible, Hungary would have to open its land market to investments from EU/EEA member states, effective from 1 May 2014.

New constraints in the farmers’ interest

With the land transfer moratorium’s end and the EU market opening in view, the government seemingly wants to set in concrete new acquisition rules and induce changes to the ownership structure and socio-economic status in the agricultural sector by legislative measures.

The wording of the recent legislative proposal of the Ministry of Rural Development suggests that the New Land Act is meant to promote land formation and profitable farming of resident family estate businesses, smallholders and medium-scale producers operating on middle-size plots up to 500 hectares. In terms of macro level efficiency, it is also communicated that priority will be given to modern co-operative structures, as opposed to large-scale monoculture farmlands.

The New Land Act would continue to prohibit land purchases by any form of foreign or domestic legal entity.

Purchases by EU/EEA private individuals would theoretically be released from transfer bans, as they will be governed by the same rules as those applicable to Hungarian nationals. However, a parallel introduction of numerous new constraints and positive discrimination for farmers against other private individuals would actually make acquisitions even more difficult than before.

The following key ownership restraints are planned to be introduced by the New Land Act:

  • Non-farmers are generally not allowed to acquire arable land. Only persons carrying on agricultural production as a main income-generating activity, having adequate agricultural qualification and tools for agricultural operations may qualify as farmers and be recorded in a relevant ploughmen registry. Farmers applying for land acquisition must have permanent residence within 20 km of the centre of the land to be purchased.
  • The concept of preliminary authority approval of arable land transfers will be implemented, resulting in pending contractual title transfers until permission is granted.
  • There would be a distinction between agricultural entrepreneurs in terms of maximum size of acquirable land owned and in leasehold. Including lands previously acquired, self-employed farmers may hold a maximum of 50 hectares; individual entrepreneurs and traditional small-scale producers could have 300 hectares; while family farms’ aggregate estate holding may not exceed 500 hectares, individually.
  • Close relatives’ absolute aggregate estate maximum,– including past and future estate and leaseholds under different legal titles, and maximum individual estate holding and leasehold of agricultural plants and integrations – is proposed to be 1,200 hectares. (Theoretically, agricultural plants – defined as organisational units of integration of land and relevant tools and assets – can grow beyond, as joining members’ existing estates are not included in the threshold. The plants may also establish cooperation with other plants.)
  • Business associations (ie, legal entities) can keep on using and operating leaseholds for agricultural purposes, but they will be subject to significant employee headcount requirements in excess of 300 hectares; the above 1,200 hectares threshold will also apply to them.
  • For estate politics purposes, the Hungarian state would still be given statutory pre-emptive right.

No retroactive effect

Contrary to certain preliminary reports, the New Land Act’s wording proposal clearly reflects that only future relations are affected. Existing ownership and leaseholds remain untouched.

This prospective effect also implies that large-scale agricultural operations whose size extends over new legislative estate thresholds can be maintained.

Controversial feedback, EU compliance questionable

Large-scale monoculture farms, which dominate the current landscape by possessing 90% of arable lands, and financial institutions have expressed concern about losing macro-level efficiency and competitiveness, and thus weakening the sector’s financing capability.

Leasehold maximisation may seriously harm the profitability of animal husbandries, typically operated by companies on larger lands.

From a different angle, smallholders fear this unprecedented state intervention does not really support the implementation of a workable Western European socio-economic model of family farms, but rather confirms the current position of large monoculture industries. Estate concentration is already huge in Hungary and will apparently stay untouched. Large-scale plants may even extend their estates by integrating members’ and other plants’ leaseholds in the operation, squeezing out resident farmers. Experts believe that the anticipated level of concentration is against diversity, countryside organic development, local suppliers’ support and, ultimately, Hungary’s foodstuff autonomy.

The licencing by authorities of land purchases also enables subjective decisions and increases the risk of discrimination and corruption.
The public-interest, non-discriminative (ie, EU law compliant) nature of the proposed restriction of free movement of capital and the market economy compliance of these measures are also questions that must still pass the test of EU institutions.

Smallholders fear unprecedented state intervention does not really support the implementation of a workable Western European socio-economic model of family farms, but rather confirms the current position of large monoculture industries with good political connections.